Japan's ruling Democratic Party elected a new leader this week, making former Finance Minister Yoshihiko Noda the country's sixth prime minister in five years. Despite sluggish growth in recent years, Japan remains a major global economy and is key to Asia's continued recovery from the 2008 financial crisis. To get a better sense of the state of Japan's democracy and the significance of last week's credit downgrade by Moody's, we talk to CIGI Senior Visiting Fellow Paul Blustein, who is a former Washington Post and Wall Street Journal writer now based in Kamakura, outside Tokyo.

CIGI: In a recent radio interview, you described Japan's democracy as "dysfunctional." With sixprime ministers in five years, what can we infer on the state of Japan's democracy?

Paul Blustein: I think political systems are dysfunctional in a lot of countries these days, but it's dysfunctional here in a kind of peculiarly Japanese way. Politics in this period – where you have these revolving-door prime ministerships – it's been a rather ugly display of pettiness and fights about nothing. In the US, politicians are polarized over a number of issues and, in particular these days, what to do about the budget deficit. Here, the fighting has been about things like when elections are going to take place and who has to resign before an election can take place.

There's actually not that much difference in the Japanese body politic about what needs to be done. People recognize that they need to do something about their very serious fiscal problems. There are arguments about how to raise taxes and when to raise taxes, but there's remarkable consensus that taxes have to rise. So, considering that there's this remarkable consensus, it's amazing what politicians here can find to fight about and stage votes of no-confidence about and cause one prime minister after another to fall.

CIGI: Noda has praised China's economic development but voiced concerns about its growingmilitary strength. What does this mean for the wider economic and security outlook in Asia?

Blustein: Well, he's a guy who feels that Japan has to take a stand against China's rising assertiveness in the region. Right now, the Japanese military is stronger than the Chinese military, at least in the high seas, where it's considerably stronger. But the last thing the Japanese want to have is some kind of serious confrontation with the Chinese. That would really risk setting off a chain of events that most people are anxious to avoid in terms of destabilizing the mutual prosperity that countries in the region have going now.

On the other hand, Noda shares the view of a lot of people in this part of the world that if China is allowed to go on asserting what it considers to be its territorial rights in various parts of the Western Pacific, that too will be destabilizing and ought to be dealt with. This could be done in one of two ways: one, by ensuring that the US and Japan military relationship remains very strong. And the second is by somehow reaching out to the Chinese to make it clear that Japan wants to see China grow, certainly in economic strength. But they obviously have mixed feelings about China's growth in military strength.

CIGI: Noda has also said he's in favour of the Japan-US security alliance. Does this offer anyinsight into how he might engage with the West?

Blustein: That's sort of a standard boilerplate thing for any Japanese leader to say. But I do think it's comforting to hear him say what he said because when the Democratic Party of Japan (DPJ) came to power in 2009, they were making a lot of noise about how they have to tilt more toward China and they were clearly less enthusiastic about some of the specific aspects of the Japan-US security arrangement that had long been taken for granted. The language that [former Prime Minister] Yukio Hatoyama used sounded, in Washington, a little bit ominous.

I think the episode back in September 2010, where a Chinese fishing boat smashed into a Japanese naval vessel, had a galvanic effect on the Japanese public. It so shocked people here that no serious candidate for prime minister is going to mess around too much in the foreseeable future with the bedrock aspects of the Japan-US security arrangement. The vast majority of the Japanese public has come to the conclusion that it would be terribly risky to test that relationship by seriously confronting the US government on the issue of Okinawa. They feel that it would embolden the Chinese, and lead China to take advantage of a US-Japan rupture by gaining control over disputed islands or otherwise using economic weaponry to force Japan to capitulate on various territorial issues.

CIGI: Given the overwhelming consensus on Japan’s debt and the belief that action must betaken, how significant was last week's credit rating downgrade of Japan by Moody's?

Blustein: It had very little effect on the market and I think the reason for that is that, as Moody's noted, most of Japan's debt is still held by Japanese institutions and by Japanese individuals. Of all the major industrial economies, I think this is truer in Japan's case than just about any other country. The figure is somewhere in the 95 percent range. And that means that Japan has a lot less to worry about in terms of losing the confidence of foreign investors than most other countries that run up big deficits.

At the same time, its debt, both in absolute terms and as a percentage of GDP, is by far the largest of any major industrialized country. So it's not as if they don't have a problem and Moody's was, quite properly, recognizing that. But one of the things they said in the reasons for their downgrade was that they felt this series of revolving prime ministers was an indication that the political system couldn't take the steps necessary to solve the fiscal problems.

I think that's harsh. As bad as the Japanese political system is and as petty as Japanese politicians can be, both the DPJ and the Liberal Democratic Party agree that taxes have to go up at some point. Particularly in view of the earthquake, which gave a pretty compelling reason for going to the people and saying, "you know, we all have to sacrifice," it's hard for me to believe that they won't take some pretty substantial steps in that direction.

CIGI: What are the prospects for Prime Minister Noda being able to build consensus and tackle the big issues such as Japan's debt?

Blustein: Unfortunately, tragically really, after the earthquake, then Prime Minister Naoto Kan just completely muffed his opportunity to be the kind of forceful leader that the country needed. It was not entirely his fault. I think there was just such divisiveness within the Democratic Party about stuff that had happened before with him. So, as a result, he was forced to deal with these ridiculously petty problems when the shock of the earthquake died down and politics began to sort of return to normal.

It's been very disheartening to see how, even after an event like that, when everyone agrees that they all ought to pull together and sort out the country's problems and put their petty problems aside, they didn't do that. I’m sure Noda has learned a lot from mistakes Kan made, so maybe there’s grounds for hope.

Paul Blustein is a CIGI senior fellow. An award-winning journalist and author, he has written extensively about international economics, trade and financial crises. Prior to joining CIGI in 2010, Paul was a journalist-in-residence at the Brookings Institution, a staff writer for The Washington Post and the chief economic correspondent for The Wall Street Journal. Paul recently released his fifth book, Laid Low: Inside the Crisis That Overwhelmed Europe and the IMF, and he is currently working on a book about China and the global trading system, which will be published by CIGI in early 2019.

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